Two Kuwaiti economists agreed that levying of a value added tax (VAT) is crucial to stability of the state's economic policies and offsetting the budget deficit under the current low prices of oil.
VAT has a distinctive feature, that is the provision of a high cash yield to the state, Dr. Nayf Al-Shemmeri, professor of economics at Kuwait University (KU), said in statements to KUNA. "This tax is linked to the value of consumption and is applicable to a large variety of goods and services; its ratio is set according to the difference between the cost of a product and the consumer price," he said.
"VAT is one of the most important indirect sources of income; it is levied in more than 150 countries. "It distributes the burdens of tax payments among the various stages of production and selling before the end user of a product or service recipients," Dr. Al-Shemmeri pointed out.
VAT is an important economic and social leverage that influences both the state economic policies and individuals' behaviors since encourages the tendencies to saving, investment and rational consumption, besides promotion of exports and economic development, he explained. On the VAT disadvantages, he said they include adding burdens to consumers through raising the prices of goods and services.
Dr. Al-Shemmeri added that the objective of taxation and cutting of subsidies is to increase the sources of income and address the imbalances of the state budget, but what is more urgent is to diversify the sources of the national income. He called for better utilization of the economic recourses of the country, encouraging the local and foreign investment particularly in industry, and improving the work environment.
He warned that unless the government adopts urgent measures to diversify the sources of state revenues, the citizens will bear the brunt of the taxation and subsidy cuts. On his part, Dr. Wa'el Al-Shuwai'ei, KU professor of economics, affirmed that VAT generates a high cash yield and is applicable to a large variety of goods and services.
"VAT stimulates economic growth and represents one of the main economic reforms," he said. "This tax plays a great role in increasing the state revenues, promotion of saving practices and economical usages of resources, and correcting the lifestyles relating to consumption," Dr. Al-Shuwai'ei noted.
In the meantime, he cautioned that the VAT will lead to higher prices of goods and higher inflation rates in the short run, thus negatively affecting the low-income people. Dr. Al-Shuwai'ei suggested alleviated such negative impacts through tax relief for staples and provision of selective subsidies or aid to the low-income people.
He also suggested addressing the budget deficit through a comprehensive restructuring of the national economy, and reducing reliance on the oil revenues to ensure sustainable financial stability. "The industrial sector has to account for a greater percentage in the GDP through directing more investment in the energy-intensive industries, such as the petrochemical industry," he stressed.
He highlighted the need of increasing the competitive edge of the private sector and creating new economic sectors with a high value added that could, in turn, create more jobs and contribute to economic development. "The current low prices of oil brought to the fore an essential imbalance in the economy policy which is the overreliance on oil revenues as virtually the sole source of income," Dr. Al-Shuwai'ei noted, urging for comprehensive economic restructuring.
The state budget for FY 2015-2016 aims to bridge the gap of KD eight billion in budget deficit through a range of measures including the VAT to be levied in Kuwait and other GCC states.